Smart manufacturers and distributors are making bold investments in solution offerings and operations, but few have yet to deploy the full power of commercial models to drive higher long-term valuation.
Leveraging higher growth and profitability.
Alexander Group extensive and timely research indicates that manufacturers and distributors who adhere to the “Rule of Five” valuation model can consistently outpace competitors and enjoy premium valuations. Based on over 100 interviews with leading executives, revenue-focused client projects, and industry research using hundreds of datasets, here are five key rules that will unlock the power of your commercial model. Part 1 of this series will focus on the first rule in detail. The others will be explored in subsequent articles.
What are the five rules of above-market valuation?
In an uncertain business environment, some companies choose to cut budgets, adopt a “wait and see” approach, and stop investing in sales team oversight. Those companies have sales managers with too many field sellers, leaving little time for strategy, direction and supervision. High ratios of greater than 10:1 significantly inhibit proactive selling, while low ratios (less than 5:1) can increase expenses and may be tied to immature player/coach selling models.
Alexander Group research indicates that companies who optimize their manager-to-seller ratio provide improved oversight and training while leveraging selling opportunities. Cross-functional collaboration, proactive customer outreach and strategy execution are ways that sales managers add value, providing the guidance needed to expand both revenue and growth.
The positive effects of lower sales manager ratios are profound. Companies with ratios of 10 or fewer sellers per manager see:
Companies with higher spans of control outperform in only one category, expense to revenue ratios, spending 0.6% less in overall sales expense (5.8% versus 6.4%). However, this savings is too short-sighted and heavily outweighed by lower productivity, growth and gross margins.
How to Get There
Your first priority as a commercial executive should be bolstering your front-line sales management. You can take the following steps to optimize your seller-to-manager ratio:
I recall a past engagement where I told a new commercial leader that his main issue in a severely underperforming company was the lack of sales managers. He needed 12 or so to get to a 10:1 ratio. He hired 20 and brought double-digit growth to a company that had flat sales for five years straight.
Part 2 of this five-part series will highlight how to use the percent of revenue from new products as a driver for above-market valuation. For more information on how you can generate higher growth and profitability, please contact an Alexander Group manufacturing and distribution practice leader.